The Monetary Policy Committee (MPC), the British equivalent to the FOMC has cut the UK’s overnight lending rate from 1.0% to 0.5%. Apparently this is the lowest rates have been in several hundred years, going back almost to the inception of the bank in 1694. Accompanying the rate cut, the BoE following after the Federal Reserve announced it will begin engaging in quantitative easing through the purchase of $75B medium and long-term gilt over the next several months to combat deflationary pressure.
GBP has responded this time around in intuitive fashion: GBP/JPY, GBP/USD and GBP/CHF have each sold off 125-200 pips since London opened, while EUR/GBP has rallied 80 pips as it continues to wind through a symmetrical triangle begun 4 weeks ago.
Next up in just a few minutes the ECB will make their own announcement….
The Guppy has been staging something of a rally on the back of a bit o’ risk appetite seeping back in and ahead of the all-but-certain BoE/MPC rate cut (consensus is held at 50bp from 1.0% to 0.5%), vaulting out of a symmetrical triangle yesterday (about which I almost posted, but life somehow got in the way) from the low 138’s around 24 hours ago to the present level, where the pair is yet again approaching a retest of 141.65.
This session brings with it a retest and tentative breakout from an ascending triangle above 140.75. With room above of 100 pips, the pair should tag the 141.35-141.65 region with little difficulty, but with a rate cut in the offing in several hours a break above this level (in place since early January) is anything but assured.
After 0700 ET I’ll be monitoring for a break above, but wonder if a rate cut will hamper the lift necessary to get over the hump. If that break occurred, the next area of interest lies at 143 and then ~144.50.
EUR/JPY and GBP/JPY have show a tight correlation, with similar consolidative constructions occurring in tandem on both pairs. Not coincidentally, the ECB also has a rate decision today, with a 50bp cut widely expected. The levels on EUR/JPY to break above are at 125.50, followed by 126 and then 128.20, the latter of which would bring the pair back to resistance set in early January, correlating to the 141.75 level on the Guppy. Past 128.20, the field is wide open to ~131, as denoted by the 261.8% fib projection line (purple)/horizontal resistance line (white) in the upper-right corner of the following chart:
Both pairs look poised to continue their corrective action to 141.75 and 128.20, which represents 100% retracement of the January highs to the lows set out in February. A break above there (of which I’ll have no certainty until it sets up on a TF that’s tradeable for me) throws the medium term bearish scenario on each pair into serious question.
Sounds like lifting a slice of pizza toward your mouth crust first. Right?
JPY crosses pulled off a significant correction last night, temporarily mitigating downward momentum by negating 100% of the price activity featured in the previous 24 hours. Europe brought about a resumption of the downtrend, peeling back the correction by retracing those moves significantly (50% USD/JPY, CAD/JPY; 76.4% GBP/JPY, EUR/JPY).
The correction and subsequent retracement have created ascending broadening wedges on both GBP/JPY and EUR/JPY:
GBP/JPY: Ascending Broadening Wedge
EUR/JPY: Ascending Broadening Wedge
This type of wedge sets up the expectation of a downside breakout: when a break through the lower ascending trendline has occurred, particularly following a partial rise (an upward oscillation in price that does not tag the upward ascending trendline as previous touches have), the probability of a legitimate breakout is highly probable. While not the most uniform, EUR/JPY’s chart with the 0500 candle’s movement up failing followed by a return to the lower trendline is a good example.
I am short EUR/JPY from the break. Other JPY crosses are under review. My concern in each of these cases is the awkward expectation of a breakout around typical levels of fibonacci support, particularly 76.4% and with local horizontal support pegged close beneath. In short, the support posed at these levels enhances the probability of failure, clouding the picture a bit.
EUR/USD looks poised for further downside as well, but with a 50 bp cut assumed as the ECB rate decision approaches tomorrow, EUR may firm up later today. As it stands, I’d expect a return to 130 or below in the interim.
FXHub posted a short article drawn from FT.com discussing – keeping in mind this was written prior to the ECB and Trichet’s speech today – the assumed correlation in price movement between the Euro (or inversely, the dollar) and oil. Worth reading for one commentator’s high level view of the relationship between currency and commodity, and also for the implicit warning therein that the Euro/Oil correlation is not immutable.
Not really; but it makes for an enigmatic lead-in, even if you already knew I have no access to Trichet’s secret files – only know that they do exist, and that beneath Bernanke’s placid veneer lies a smoldering jealous rage because excerpts from Trichet’s secret files fetch a higher price on the black market than Bernanke’s. This is why the FOMC meeting minutes are not comprehensive. Who can say amidst discussions of how many billions to print in T-bills for the TAF what paroxysms of secret file-related acrimony burst from Bernanke’s lips?
A lot of attention has been concentrated on the ECB’s decision in the past few weeks, especially with the consecutive events of G7, the EUR/USD 1.60 breach and the dollar’s significant rally over the past three weeks. Not only that, but the concern about “turmoil in the financial markets” spilling over to the EU sufficient to merit a rate cut was and continues to be highly relevant. Nevertheless, the ECB held rates steady, as summarized:
To sum up, a cross-check of the [aforementioned] outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment that upside risks to price stability prevail over the medium term, in a context of very vigorous money and credit growth and with no significant signs of supply constraints on bank loans. The economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains high. Against this background, we emphasise that the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council.
Little changed then, except that the notion of an imminent shift toward shoring up economic growth is dispelled among onlookers, at least for the time being. Read further about the economic and monetary analyses in the full speech here or the Central Banks RSS feed in the sidebar.
How does this affect the EUR/USD? The post-announcement volatility bumped the pair back across the fib fan and retracement level mentioned last night, but the reaction was muted overall, indicating the dollar rally may have some staying power. In fact, price moved within 20 pips of the descending trendline on our falling wedge but has since backed off, though the move has stabilized the pair around 1.54. But, a break of the 1.53 region will be necessary to regain the downside momentum.
I pulled these charts from Oanda (writing from the MT4-less Mac side of my laptop) to give a general idea of what I’m talking about here:
Daily:
Hourly:
With the exception of very shallow improvement against two comdolls (AUD/USD and USD/CAD), probably because of resilience induced by commodity prices, the dollar has rallied across the board for three weeks now. Every market speculator and their grandmother knows it, too (and to think only a few years back we were without 24 hour financial news). Except for some uber-economically-savvy Europeans who derive an elitist attitude from the appreciation of their currency (need I remind the Germans of the Papiermark?), everyone’s pretty excitable over change in course, now clocking in around 700 pips on the EUR/USD. The question on everyone’s mind (and if you’re on CNBC, emitting from your make-up-dabbed maw every 47 seconds, amidst babble about corporate earnings due at the time and the FOMC’s last rate decision): how far will it go?
If Trichet and Co. go dovish or we get into talk of rate cuts and a rate cuts themselves, this corrective move could really dig in its heels. This is definitely a time to practice vigilance over anything emitting from the ECB in the way of speeches, etc.
Now: the daily chart puts this moving in a falling wedge from April 15 or so; is a continuation pattern evolving? A downward move of similar duration (well, thus far) that occurred back in November/December that from 1.49 to 1.43 comes to mind as a precedent. We know what happened with that dollar rally (splat), but the ECB was operating under different assumptions (US-EU economic decoupling then, perhaps not so much now) then. So, while I see a continuation pattern the making here, I’m not as sold on it now as I was then.
Any other reasons? A couple near-term that are coming about tonight: The 50% fibonnaci fan from 144.15 to the recent high above 160, currently at 153.17 is being toyed with; but still, broken. Pair that with a break of the fib support @ 153.65 from early March (revisited on 05/01, but broken on 05/06) and you’ve got a significant breach. Can it hold? That’s what we’ll find out, beginning with Frankfurt’s open in 11 minutes.
Except I’m going to bed, so enjoy the fireworks without me.
